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November 6, 2013

Retirement Saving Tops Paying Debt for Mass Affluent: Merrill Edge

Respondents agree financial education is important, starts at home

Mass affluent investors are making retirement saving a priority, according to a report from Merrill Edge, the branch of Bank of America-Merrill Lynch that focuses on the mass affluent market. What’s more, they’ve learned their lesson the hard way, and many feel families should more proactively teach their children about financial issues.

Braun Research conducted the survey in September among over 1,000 Americans with assets between $50,000 and $250,000. The report estimates the total number of households in the United States with that level of assets is around 33 million.

Although only 39% of respondents said retirement was their top financial focus, it outpaced paying debt at 26% and over three-quarters said they were actively looking to grow their retirement nest egg. Merrill Edge noted that this was a “major shift” since the period after the recession when mass affluent investors were focused on short-term obligations. However, 44% of respondents cited paying debt as their biggest financial accomplishment of the past year.

“This is an inflection point in terms of the mass affluent customers refocusing themselves on long-term savings and retirement and switching away from paying down debt,” Alok Prasad, head of Merrill Edge, told ThinkAdvisor on Wednesday. “They feel very good in terms of thinking about that transition and thinking more practically about retirement.”

He noted, however, that the average age of the mass affluent client is 55 and that they have saved only $165,000 for retirement. They hope to retire at 66 with $736,000, he said. “To do the math, the need to close the gap is extremely high over the next 10 years or so.”

Unsurprisingly, older investors were more likely to cite retirement as a top priority, but the report found younger investors expected to save more overall. Millennial respondents, who admittedly have less currently saved than boomers, expect to save an average $822,000 for retirement. Boomers, a quarter of whom said they already have $150,000, expect to save an average $645,000.

Men expected to put away an average $855,000, while women said they will likely save only $623,000.

“They’re saving less and their lifespan is longer on average than men, and therefore the gap is going to become much more substantial for them,” Prasad said. “The issue, at least in my mind, is around how do we engage women more in terms of saving and getting engaged in terms of getting access to financial advisors. We’ve got to do a better job as an industry of engaging women.”

Half of respondents said they had learned to manage their finances through trial and error, but nearly 90% said parents and grandparents should educate young people on financial issues and 71% said that education should happen before they turn 18.

That focus on education has already taken hold for families of the youngest respondents. Sixty percent of Gen Y respondents and 53% of Gen X respondents said they learned about financial issues from their family members. By comparison, 61% of people over 65 and 53% of boomers said they learned on their own.

The most important financial value to impart to their children was, for most people, how to use credit cards. Over half of respondents said using credit and debit accounts responsibly was the most important financial skill. Forty-six percent said paying bills and saving were the most important skills, followed by making and sticking to a budget at 43%.

Here again, Merrill Edge found that message taking hold among younger respondents. While 83% of Gen Y respondents said they have and use a budget, just 57% of people over 65 agreed.

“We are seeing the mass affluent recognize the value of saving for retirement, but they are taking actions in terms of closing that gap. However, we are seeing 61% of them saying they may have to delay retirement because they haven’t saved enough.”

Although most respondents agreed financial education starts at home, many prefer a financial advisor’s guidance to information from other sources. Forty percent of all respondents said they get their information from an advisor, compared with 28% who talk to family and friends. Less than a quarter get financial information from a brokerage or bank.

Other factors playing a role in mass affluent investors’ investment decisions are the economy (70%), interest rates (66%) and inflation (64%).

More than 61% of respondents said they expected to retire later than they thought they would, up 6% since the last time the survey was conducted in the spring.

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